AutoZone, Inc. (AZO) Earnings Call Transcript & Summary

Next up, we have AutoZone, one of the largest aftermarket distributors in the U.S. with 80% exposure to the do-it-yourself customer, but a very fast and growing Do-It-For-Me customer base. In fiscal year 2021, the company generated $3.4 billion in EBITDA and $15 billion in revenue, about 21 million shares now at $1,800 for a market cap of $38 billion. Speaking today is Jamere Jackson, Chief Financial Officer, who began with the company on January 1, 2020. So welcome to the conference. Thank you for being here. We are excited to hear your thoughts.

Thank you very much. I want to support my [ noted ] mask for a few minutes here before I lose a little branding effort on there. Good morning, Jamere Jackson. I've been the Chief Financial Officer at AutoZone. I joined the company about 14 months or so ago. Before that, I was the CFO at Hertz and before that I was the CFO at Nielsen Holdings. I'll spend just a couple of minutes just giving a little bit of an overview of the company, talk a little bit about some of our recent results and then spend a couple of minutes on our growth strategies going forward, and then I'll take questions. If you think about our company, our competitive advantage, our secret sauce, if you will, is this extraordinary commitment to the customer. It is what sets us apart, we believe. And it all starts with the AutoZone pledge, and the first line in that pledge is putting customers first. We have a culture of putting customers first. That set us apart, and it means taking care of customers through all of their challenges. And we've been focused on that. And we spend a lot of time thinking about what it's going to take for us to serve those customers in an extraordinary way in the future. A little bit about our company. We've got almost 6,800 stores in total, about 6,100 of those stores are in the U.S. We've got about 700 stores outside of the U.S., about 660 in Mexico. Brazil is our newest market, where we just finished sort of testing that over the last 8 or 9 years or so. We're really looking forward to some pretty remarkable expansion in Brazil. We think Brazil has an opportunity to be a market that's at least the size of Mexico going forward. You can see the brands below. Our primary brand is our Duralast house brand, which is one of the leading brands in all of the automotive aftermarket. This is a business that has been consistent and steady really through the cycles. You can see our fiscal year '21 EBITDA of $14.6 million -- or sales of $14.6 billion, EBITDA $3.4 billion. And we've grown pretty consistently mid-single digits really through the cycles. It's been a business that has been remarkably resilient. On top of that, it has been steady same-store sales performance. You can see that we've had flat to positive same-store sales growth over the last 15 years or so, and our average growth has been roughly 4%. And you've seen that growth over the last couple of years really accelerate coming out of the pandemic as we've grown our market share and as we've seen some expansion in both the DIY and the commercial markets. This has led to really consistent and strong EPS growth. So a combination of really strong top line growth, a culture of thrift where we're driving cost out has really led the consistent strong EPS growth through the cycles. It's been a fantastic business. We've grown EPS in the high teens, if you will, over the last 3 years. That's really accelerated into the 20s as we've, again, come out of the pandemic and seen not only the lumpiness of the stimulus, but again, the growth of the market overall. And we've been a significant buyback player in the marketplace. We've returned a significant amount of cash to shareholders over time. Over the last 11 years, we've done about $17 billion in repurchases, and we did about $3.4 billion last year. We've taken out about 85% of the shares or so since we started our buyback program. We're now down to about 21 million shares or so. Just a little bit of an overview of the market. First is the do-it-yourself market, or DIY market, we call it. It's about a $70 billion market. This is where the customer does the maintenance work themselves without the aid of systems or performance or professionals working with them. It's about a $70 billion market. It's been consistent and steady and growing about 5% a year, and we've maintained the #1 share in this marketplace for a number of years. The second piece of the market is the Do-It-For-Me market. Again, a business that's a little bit over $70 billion. This is where customers who prefer to have a professional work on their vehicle and repair the vehicle for them. Again, roughly a $70 billion market. That industry has grown low to mid-single digits over a 10-year time frame. It's a highly fragmented industry. And even though you have big players on the DIY side of the business, the reality is that we, as a big player in this market, are only about a 4 or 5 shares. So there's a tremendous market opportunity for us. It's one of our key growth opportunities as a company and will be key for us to be a faster-growing business going forward. Our sales in fiscal year '21 were about $3.3 billion. They were up 23%. We've grown the business double digits for the last 6 quarters or so. Talk a little bit about our growth priorities, really 3 growth priorities. One is our DIY business, our DIFM business and in our international expansion, which I alluded to a little bit earlier. On our retail business, we typically open 150 to 170 stores a year. We are continuing to expand our store footprint in the areas where it makes sense for us to go do. We're continuing to make ongoing investments in our people and our technology to improve the service advantages that we have. And one of the big challenges for us has been how do we continue to expand our parts coverage in those markets and get those parts closer to customers. We're doing that with an expansion of our Mega-Hub strategy, which typically carries about 100,000 SKUs or so. When we open those Mega-Hubs in a market, we see a meaningful lift in both our DIY business and our DIFM business. We've grown our market share over the last 2 years or so. And if we look at the front of the house, if you will, the front of the sales floor, we've grown that market share about 3 points, and we've maintained that coming out of the pandemic. On the DIFM side, again, we've been growing this business double digit. And last year, we grew at 23%. We're gaining market share in this space. Just a few years ago, we were a business that was a little over $1 billion, and we're continuing to expand our parts coverage in the marketplace. And that strategy is the key for us to become a faster-growing business. And we've done that with really 4 focus areas. The first is expanding the parts coverage in the assortments. We've done that with our Mega-Hubs. We continue to have a tremendous opportunity in the marketplace. We've seen a meaningful lift in our commercial business. We're serving both national accounts and the smaller or local accounts and doing a tremendous job there. The second thing is we've invested in technology to speed up the delivery times to our customers and make it easier for them to do business with us. We've invested in our Duralast brand, which is our house brand becoming one of the top brands actually in the commercial space. And the quality of those parts, along with having more parts availability in the marketplace and competitive pricing has really enabled us to expand this business in a meaningful way. And again, we're catering to both the large customers as well as the smaller players as well. Our international footprint really offers a really attractive opportunity for us. You can see we have lots of dots on the map in the U.S. We have about 660 stores in Mexico. We think that business potentially could get to a 1,000-store footprint over time. And we think the Brazil market could be as large as well. We've recently named a new leader for our international business, Tom Newbern, who's one of the best operators in the industry and certainly a tremendous asset inside of AutoZone. He's going to lead our international expansion for us. And we're pretty excited about the growth playbook that we have there. So our mission inside the company really is to create a business that's grown faster than it has historically. And we do that with the focus areas that we have in our 3 key growth priorities. One is on the U.S. retail side. Again, those market share gains that we've had over the last couple of years or so, we're looking to maintain them. We're investing in the people and the systems and the processes to be able to go do that. We're putting the inventory in the marketplace. We're taking care of customers. And that DIY business has been remarkably resilient through the cycles, and we'll continue to be the leader there. The commercial business will actually lead the way for us as we think about our -- creating a faster growing business in the future. We've looked to accelerate that growth. As I said, we've grown the business double digit over the last 6 quarters or so. We are currently looking to expand that Mega-Hub footprint and actually have more density in the marketplace, which puts parts in closer proximity to our customers. And we've done a tremendous job of executing in that space. And then international, again, we know the places where we believe this business model translates and we think we've got an exciting opportunity for us in the international space. And this is all underpinned by a very strong culture and a great leadership team. We've got some tremendous leaders inside our company who have deep domain expertise in this industry, have done a tremendous job of executing. We're looking forward to leading this business in the next decade or so. So that's a little bit of an overview of the business. Sorry that I went fast, but I wanted to leave as much time as I could for Q&A here. Thanks.

Thanks for the overview. I do want to touch on 2 kind of company-specific or industry-specific questions. Just that you did touch on it, but who are your customers and what do they care about? Why did they go to AutoZone? How do you compete against some of the other distributors that presented today?

Yes. So if I think about our customers, I'll start with the DIFM or the commercial side of the business. Those customers are in a competitive dogfight most of the time. It's a very competitive industry. And the way that we've taken care of those customers, we've built very local relationships. I've always alluded to our commercial business as a very local business, if you will. We've got 6,000 stores in the U.S., about 86% of those stores have a commercial program. And we build those relationships in the local market. The first order of business is to make sure that you have the parts and have the availability. And so as we focused on adding inventory to the markets, expanding our Mega-Hub and Hub footprint, that is critical to be #1 on the call list. The second thing is to make sure that we have quality parts, and we've invested a lot in our Duralast brand over the years. That has given us the confidence to go in to sell in a much stronger way than we have in the past. And quite frankly, our customers have confidence that the Duralast parts are going to be fit for the job. The third thing is you got to have speed to market on the commercial side of the business. And we've invested in handheld technology that enables us to get the parts to the customers faster. It's easier for them to do business with us. And we've had a tremendous response from our customers on the things that we've done from a technology standpoint, how that's aided our business. And the last piece of it is just being priced competitively. We've really focused over the last 2 years or so and using sophisticated data and analytics to find the right price points, if you will, to be able to compete in the marketplace. We've seen a significant lift in our unit volume and our market shares over time. And we're continuing to execute. And so that commercial business is, again, a key to our growth going forward. From a DIY standpoint, it really comes down to 2 things. One is availability and customer service. And what we've learned during the pandemic is that DIY customer is not only resilient, but we've seen some shift in their behavior. If you were a DIY customer who was shopping for some of the categories that we carry in a big-box store over the last year or so and you were in a crowded big-box store behind a customer that have a cart full of consumer staples, that was a pretty tough experience. And what we're seeing is those customers came to our store, which is more of a specialty retailer. It has a broader assortment, great customer service. I know, by the way, price was not a dissatisfier. We've seen that be a winning formula for us and it's helped us grow our business over the last 18 to 24 months, for sure.

Perfect. And then that brings us to overall growth in general, which has been impressive. The last year miles driven down maybe 10%. You posted 20% comp, which this past quarter we saw a 2-year stack over 26%. That is very impressive relative to the 2% to 4% we've previously seen. Can you just kind of dissect that growth? And it sounds like you did take some market share, kind of dissect that growth and where you think it's coming from?

Well, our execution has been fantastic over the last 24 months or so, and we were very focused on, number one, taking care of customers. So at the outset of the pandemic, I give the company a lot of credit. We certainly didn't blink. We didn't furlough employees. We didn't take people out of stores. We didn't back off our service levels. We continue to execute. And as the demand rebounded, we were there to take care of those customers. We've been very focused on making sure that we have parts and parts availability despite the challenges in the marketplace with the supply chain. In fact, we were out ahead of some of those challenges and been able to navigate that environment pretty well in this environment. And then we've been really focused on making sure that from a pricing standpoint, that we're priced competitively in the marketplace. And you put all of those things together with the execution that we've had, it's been a really good run for us.

This is a question we're asking everyone, I mean this is significant growth, right, 26% 2-year stack. There had been some thought of some reversion to the mean, but it really doesn't look like it's happening. Can you just maybe dissect some of your categories, do it yourself versus Do-It-For-Me, anything that helps us understand how this has continued? But it does sound clearly there is the market share gains as well.

Well, I think, number one, we have seen some market share gains over this time period, and they've been significant. We've done a really good job of taking care of those customers and bringing them back in. And I look at a couple of data points, at least in our business. One is our loyalty programs have actually expanded over time. The customers who are already in our loyalty programs are actually coming back to visit us more frequently. We're bringing new customers into the franchise, if you will. And I think the thing that really keeps them coming back is that, again, we've had this laser-like focus on customer service during this time frame. We live this pledge that we have. It's not just something that we sort of recite in every meeting, but making sure that we put our customers first. We know our parts and products. Our stores look great, and we've got the best merchandise at the right price. Taking care of customers in a meaningful way during this environment has actually turned into us having more customers coming out of the store, and they've been loyal. I think you've got a couple of big macro things that are happening as well. Certainly, you've heard a lot about it with the chip shortage and what that's meant for the SAAR, the knock-on effect for the used car industry, what that's meant for customers. You're seeing the average age of a vehicle actually tick up. You're seeing customers invest in taking care of their vehicles and extending the life of those vehicles. And what was interesting during the pandemic is that, initially, customers have discretionary time and money, and so they spent money on discretionary categories. We sold a lot of washing wax and tools and paint and body. But over time, what we saw is that customers began to also invest in the things that were going to extend the life of their vehicles as well. And so we've had this dynamic where customers are spending the money. We don't see, at least over the next 12 to 18 months, the challenges there -- the macro challenges that are causing customers to spend more money on their vehicles, to take care of their vehicles. We don't see those abating for probably the next 12 to 18 months or so. It's given us a tremendous opportunity to grow our business in the meantime.

That's great. And then since you brought it up, just the different categories, discretionary, failure, maintenance, could you provide a breakdown of what AutoZone sells in terms of those type of underlying categories?

No, we haven't broken it out for competitive reasons. What I will say though about the growth rates is initially, we saw the discretionary categories really spike. And as customers were home and not driving their vehicles, obviously, that put a little bit of a damper on failure and maintenance. As you've seen sort of the snapback in miles driven, the failure and maintenance categories picked up, and we didn't see a tremendous drop-off in some of the discretionary categories as well. And that is attributed, quite frankly, to the growth that we've seen in market share during this time frame. So we feel pretty good about the fundamentals of the business. I would say the fundamentals of the business have never been stronger probably in the history of the company. So I'm pretty excited about our future.

And I do want to touch on the supply chain issues, but pricing is another thing that's come up quite a bit. Can you also kind of break out pricing versus traffic? Any prices you've been able to push through and just give us an overview of why AutoZone is able to push through those prices?

Yes. Well, this is an industry that is incredibly disciplined when it comes to inflation and pricing accordingly. One of the hallmarks of a remarkably resilient businesses that you have to be disciplined really through the cycles when you have inflation or hyperinflation. If you have the ability to go past that to the consumer, you have to do that. And this is an industry that has done that for decades, and we continue to benefit from that dynamic. We have seen lots of inflation for the reasons that we've all talked about. There's labor inflation, there's logistics challenges, there's supply chain challenges, all those things have created an environment that gives us inflation that's a little bit higher than normal. We've been able to pass that through to customers. And our business has held up very well in that environment. In some respects -- we don't take it lightly, but in some respects, inflation is our friend. Typically, when we see those inflationary impacts coming, we'll try and price a little bit ahead of the costs that are coming. And we typically don't see prices go the other way when things sort of normalize a little bit. So it's going to be an environment where we expect to see some inflation for at least the next 12 to 18 months or so, just given some of the challenges that are in the industry, whether it's labor or it's logistics or supply chain challenges. And so far, we've been able to price accordingly, and we've seen our entire industry be pretty disciplined in that regard.

Great. And that's really a question we're trying to understand. And you talked about just -- can you discuss the supply chain issues, but also when do we see them subside? What are your thoughts on any improvement there? And then also just how you're able to meet demand with your current inventory levels?

Yes. I heard somebody say this morning that this is probably the worst supply chain crisis since World War 2. I'm not old enough to remember what that actually felt like. But I can tell you that in my short career, it's been -- this is a pretty challenging supply chain environment. And you've had a number of things that have impacted it. Certainly, COVID sort of started a chain reaction, if you will, even labor shortages that probably were birthed out of COVID. You've had logistics challenges associated with it. And as the world sort of returns to what we all hope is some sense of normalcy, there's a pretty significant logjam in the supply chain that it's going to take a while to work through. And I -- if you asked me at the beginning of the year, I thought it was -- it probably worked its way through by the end of this year. Quite frankly, we could be in this environment for another year or 2 years before we get to the point where things sort of normalize a little bit. We've done a tremendous job of navigating and I give our supply chain and merchandising teams a lot of credit. We were already in the process sort of pre-pandemic, thinking about a growing business and what that meant for our supply chain. We've been looking at qualifying second sources and third sources, in many cases, diversifying the geographies from which we get our products. So we were pretty well positioned. That being the case, our in-stock levels still aren't where they need to be. Fill rates are challenged in certain categories. But I'd say we've done a pretty good job overall navigating those challenges. All of our suppliers are working really, really hard because, again, in this environment -- it's a tremendous growth environment for them as well. And even though it's challenged, there's a pretty big prize out there for them if they can go execute. We partner very closely. I would say the cadence of the discussions have ramped up. People that you talk to on a monthly or quarterly basis, you're probably talking to them on a weekly or a daily basis. And the level of collaboration has just been tremendous. So we've been pleased with the execution overall, even though it is a very challenging environment.

Great. And given these inventory needs, the difficulty in filling them, do you think scale has benefited you in terms of maybe gaining market share?

Certainly scale has helped us in some instances. But the other thing I'll say is that, again, we were doing a pretty good job sort of prepandemic thinking about what our business was going to look like 5 years, 10 years from now. And that caused us to think very differently about some of our supply bases, who were the folks we were doing business with, where we were looking to place new business. And we've done a great job. Not enough to completely offset the challenges that we have, but I think we've done a really good job of getting out ahead of certain things and working very closely with our suppliers. And again, when you're putting the kind of numbers on the scoreboard that we are and many of our competitors are, our suppliers are all -- they're all incented to do everything that they can. And the other thing that I'll say in this environment is that we've all been fair. There's a fair amount of empathy for what we've all been through in this environment. And I think that's created a pretty healthy industry dynamic as well.

Yes. Next question from the audience?

Want to ask about labor retention and your ability to keep what is a very trained -- a very highly skilled and trained employee in one of your boxes.

Yes. Part of our company culture is to invest in a very meaningful way in our AutoZoners. And quite frankly, in this environment where we have lots of labor challenges. We -- that has worked to be one of our competitive advantages, if you will. So we've spent the time investing in our AutoZoners. We spent time early on putting our best foot forward in terms of offering additional emergency time off to give our AutoZoners an opportunity to take care of themselves and their families. And those kinds of things sort of resonate, if you will. That being the case, it's a really tight labor market. We're doing all the things that we can to increase applicant flow, making sure that we're getting the right people, if you will. So there was a concern early on that we go out and get people that weren't fit for the mission or fit for purpose. So we're not only getting the numbers of people that we need, but we're getting the right people. And we've had to be innovative in terms of how we go to the market and attract talent to the company. And we're in pretty good shape, but it's not something that we're all sleeping well about these days. That's for sure.

And the last question, Bill Giles had presented here for many, many years, pre when I started, and we had always assumed 2.5x leverage ratio. All that free cash flow that AutoZone generates to come back to shareholders. As the new CFO, do you see any change in strategy or anything going forward?

Yes. Well, Bill Giles' got a lot of things right, and that was one that he got right for sure. I mean we -- longer term, we do see our leverage being in that 2.5x ZIP code. That gives us tremendous financial firepower to invest in our existing assets, to grow our business and give a ton of cash back to shareholders. And we've done that really through the cycles here, and you can expect that to continue as the business holds up.

Okay. Great. Well, we've run past time. Thank you so much for being here. Again, we always enjoy AutoZone's presence at our conference. Thank you.

All right. Great. Thank you.